E322 | Michael Fordham on Why Integrity Beats Flash in Private Lending – PTNC Know Your Speakers Series

Today I'm joined by Michael Fordham, the founder and president of Silverstream Funding.

It's a boutique private lending firm that has a really interesting approach.

We talk about the private lending space, what you should and shouldn't be doing, and get excited about having Michael come speak at the Paper Trail conference that we're hosting September 18th to 20th in Chandler, Arizona.

A little bit more about Michael was he practiced corporate securities law at JPMorgan Chase and other institutions before, during, and after the financial crisis.

We talk about his first deal, which was really interesting because he really went all in.

And we share insights of the do's and don'ts, not only in private lending, which Michael's focused on, but just investing in the note space as well.

So hope you really thoroughly enjoy this episode and look forward to seeing you all September 18th to 20th in Chandler, Arizona.

Take care.

Michael, how are you doing today?

I'm doing awesome.

Very good.

Thank you very much.

Happy to be here.

Thanks, Chris.

Yes.

It's a Friday and man, my energy level this week has been, today has been, I think, sucked out of me from this entire week has been a long week.

So it's been long for me too.

I, I, on my emails, I say have a great weekend at the end just because I know that I wish the best for the people I've been working with.

Yeah.

So let's kind of dive right into it and let's start, you know, talking about, you know, your story and how'd you get involved in investing in the first place?

Well, you know, so I used to live in New York City and at the time, Harlem, which is part of Manhattan, it was there.

A lot of the buildings were abandoned.

There was a lot of deferred maintenance.

And at the time, there were also people who were starting to fix up their homes, their townhouses usually, and investors who were buying them.

And what I did is I spent one year probably, it was one year probably every weekend walking around Harlem and asking the people who live there and the investors and the workers questions and trying to do my due diligence.

And what I ended up doing, you asked, My first investment was.

Yeah, that I bought a commercial building in Harlem.

And it was, wow, that's a pretty, that's a big bite of the apple.

Listen, I didn't have any idea how much risk I was taking on.

It worked out so well and I'm just a little bit lucky.

But let me tell you.

So this was a cursor building.

It was 25ft wide and 50ft deep.

So it wasn't that huge.

Right.

We got renovated it at one point.

You could stand in the basement and look all the way up to the sky.

That's how gut renovated we did.

Oh, wow.

Yeah, it's really cool.

And we, we tried.

I tried to do it very inexpensively and.

And we had exposed brick and big spaces and.

And I ended up getting the.

The highest rents per square foot in.

In Harlem.

I turned it into a residential building and lived on the top floor.

So.

Nice.

So what year was that?

What's that?

What year was that?

Oh, my gosh.

Okay.

Around there.

Yep.

Okay.

Yeah.

So back in the day.

Yeah.

Yeah.

Yep.

Okay.

So that's really interesting.

Wow.

Starting your first.

Wow.

It was crazy.

It was like.

It was crazy.

Wow.

Yeah.

No, I, I bought it for half.

I bought it for half a million.

I got a $10,000 loan from my uncle.

I.

I got half a million dollar loan and then I sold it later and, you know, made a lot of money, but I wish I had it.

I mean, that.

That's insane.

And you know, I usually roll a.

Next question.

What's something about your journey?

Most people don't know, but probably should and.

Right.

I mean, you've already, like, mind blown me with that first answer of starting out with a, you know, dilapidated property like that in Harlem.

But, you know, what's something else about the journey?

Well, okay, so something that people don't know about me is I used to work on Wall Street.

I'm a corporate securities attorney.

Worked on Wall Street.

I worked at two of the top New York City white shoe law firms.

We did IPOs, initial public offerings for.

With a lot of the major investment banks and a lot of large companies both here and in Latin America.

And, and that was very exciting.

Have our, Our.

Our clients on the, the COVID of Wall Street Journal is that sort of thing.

But let me tell you, if I may.

Yeah.

Because we're talking about things that people.

I wish people would know about me, but, you know, but so then I worked at J.P.

morgan, and at J.P.

morgan, I oversaw all the benchmark debt issuances of the entire firm.

So billions.

Billions of dollars worth of bonds.

Right.

And you know what is, what's interesting?

So, so I have a private lending firm.

That's.

That's what I do.

Right.

We.

We learn to.

To.

We lend privately bar.

So it's interesting, though, because it's.

It's very similar to what I did at J.P.

morgan, and let me tell you why.

Yeah.

It's.

So what we do is we have funding partners that lend money mostly to, to house flippers.

Right.

And then we have the security, which is, you know, a first lien on the property.

So, so, so think about the bonds that, that, that I was working on.

These billions of dollars worth of bonds you have.

Who's your investor?

Well, it's an institutional investor instead of our, our funding partners and, and us who, who do the investing.

What do they get?

They get a bond.

Bond.

It's an iou, right?

Yeah, it's a note.

It's really a note.

I mean, it's a debt instrument.

Yeah, yeah.

And it's, and it's very similar to what we do.

I mean, we have a, a note, a mortgage or a deed of trust or something.

It's basically an iou.

The institutional investors, you don't want to get paid every month or every, usually every quarter or whatever and get their money back at the end.

And, and then their security is the, the credit of the company that they believe the company is going to be fine, is going to pay its debts.

And, and we use, again, we use the, have a first lien on, on the property.

So, Chris, can I tell you one other thing about this?

Yeah.

Oh yeah, absolutely.

So this is a fun time and nobody knows about me.

I'll be really quick, but I was actually at JP Morgan in Lehman Brothers fell and when we acquired Bear Stearns, it was really an extraordinary situation and I got to play a role in that.

Also.

I worked for a Swiss bank in Zurich for several years during the time when the US Government was going with criminal sanctions against the Swiss banks because they were.

Remember.

Do you remember when you used to build up a Swiss bank account?

Oh, yeah, because I didn't have the money, but yeah, I knew you could have one.

That was like the joke of like a Cayman Islands 1.

It was Swiss and Cayman Islands, right?

That's what you do.

Yeah, yeah.

So the US Government was going after these banks and it was quite so.

I mean, I did work on other things too, but anyway, people don't know that I did big finance and legal career and that's fine because now I do firm and that's what I do.

So a few things I'll mention.

I bet you the rate on the bond is much lower of what JP Morgan pays than what you pay your investors.

I would have to guess you're darn right.

Darn right.

It was a, it was a, it was actually a stock Certificate that had it was 12%.

Okay.

And I should have just bought it, but I was, we were so scared that everything was going to fall apart in the financials.

From what I've seen when you were at JPM and going, you know, as part of that Bear Stearns, was that kind of your role too?

Were you like in any involvement in regards to like I don't want to use term auditing but like reviewing what it is you were looking to acquire.

Or take over to some degree.

So, so I oversaw all the bond issuances.

I remember someone asking me if at some point, so what bonds does, what bonds does Bear Stearns have?

How are we going to find out?

It's not that hard.

But so I remember going, oh.

So I, I took some of that on.

I didn't play a super major role in that.

But going it was across.

Bear Stearns was across the street.

Yeah, it's the street I found person who does my job at Bear Stern sits and you know, she wasn't there.

I, I saw some, I borrowed or took some notebooks that looked like they had some good information.

But yeah, okay, that was a crazy.

So coming from your background in industry finance, securities attorney, you know, you are much more sophisticated.

I'm putting words in my own mouth right now, you know, much more advanced and sophisticated than I'd say the average, you know, private lender.

Because a lot of people come from real estate, they get tired.

Landlords, they're not as you know, they're very savvy individuals.

But again, it's a different mentality and mindset and you know, being in the finance, you know, having the background you have, everyone's got some type of core investment philosophy.

And I'm curious, you know, know if you could short quickly describe yours, you know, what would it be and where did it come from?

Well, thank you for the, thank you for the compliment.

My philosophy, of course the number one philosophy of investing is don't lose money.

Right.

But my philosophy is to be humble.

So you just gave Me, a great compliment.

And let me tell you, when I started being a private lender, I needed to, I needed to learn a lot and, and I loaned out my own money before I would take anyone's money to loan out for a number of years.

It's really well in, in our private lending, we only take borrowers by referral.

Even.

So I will interview them, of course.

And if they are telling me that everything's always fine and they've never made a mistake and they've never lost money, if they're not humble, they being humble, being a little bit scared too, then, then I, I think there's a problem.

I lend money to a number of people who I know have a lot of cash.

The best borrowers.

Yeah, well, they're borrowing from me for high rates.

Why are they doing that?

Because they're humble.

They know that things can happen and they want to have that cash there.

So.

And I feel like for me, I do.

I never want to, even though we're doing great, but I never want to think I'm cool.

I want to be a little bit scared.

I want to be looking around because things, things for me, it's humility.

Yeah, no, that's, that's great.

And we always, you know, internally say the best borrowers are the ones who want it but don't need it and are not desperate for it.

Because like you said, we've had borrowers who have seven figures and, you know, accounts and stuff, but they're getting a loan and it's like, oh, why are you getting a loan from us?

And it's basically, it's like, well, we were going to go get a bank loan.

It takes too long, it's too much effort and we've got our money tied up or, you know, it's invested somewhere that we could shift it around, but it's, it's more work.

And you know, it's like, hey, look, this is the easier path to take.

And you know, and if they can't get it, then it's like, okay, we'll use our own funds.

But you know, it's borrowers that.

And then we have borrowers on the other spectrum who, you know, are, have properties that are cash flowing negative and they're basically cash poor.

And they're like, I just need money.

And they're trying to refinance and leverage every asset they have to tilt.

And those usually don't end up well.

Yeah, yeah.

So then, you know, you kind of, I think answered.

Next question I was gonna ask is, you know, Principle you live by in business that guides how you treat everybody.

And you basically, I mean, answered that with humility.

But I know if you have something else as well.

Well, I.

So I would say reputation.

Doing.

Doing what you say you're going to do.

May I tell a story?

Yeah.

Oh, 100%.

And I'm just laughing right now because I've been on podcasts and everything that you're saying is basically like, I did not prep him for any of this because we always talk about humility, being humble, and just do what you say you're going to do is like what we always say.

So I'm just kind of internally.

If you see me laughing, that's why.

But no, go ahead, tell your story.

Okay, well.

Okay, well, that's.

That's really interesting.

So I used to be a Sunday school teacher.

All right.

Long time ago.

Okay.

And I got a question and someone raised their hand and asked me a question.

I can't.

I don't remember the context, but New York lawyers were known to be slimy and dishonest.

And this person asked the question, well, Michael, how do you stay.

How do you keep your integrity while being a New York City lawyer?

And the question just kind of took me aback because I was working for these major law firms that do everything right, and it's all about reputation, 100%.

And I learned that it's all about doing what you say you're going to do.

It's all about integrity.

And I would say that is the case for.

For me doing what you say you're going to do.

I had a.

I had a borrower who called me on an easter Sunday at 4 o' clock.

I was at my cousin's house and the, the private lender had said no at the last minute, and he said, can you lend us $700,000 tomorrow?

And we did it, which was really cool.

Oh, wow.

So it's a good story for that reason.

But the, the private lender didn't.

Pulled out of the last minute and it was for.

I don't.

It was for a stupid reason, and I will not do that.

I.

It's all I.

Reputation.

Doing what you say you're gonna do.

That's.

That is it 100?

100.

Yep.

I agree completely.

And I was again internally joking when you talked about, you know, New York attorneys and, you know, kind of slime balls and stuff.

Yeah, yeah.

I'm from Massachusetts and I'm a Boston sports fan.

So we think everybody from New York is like that.

So don't worry.

It's not just the attorneys, it's everybody in New York when you're from B.O.

yes, but so, you know, we have you speaking at the, you know, our Paper Trail conference.

You know, I always like to ask people, you know, why, you know, why it's important for you to be part of the event.

Sure.

I'm, you know what?

I'm very excited, genuinely very excited to participate.

I, I have a kind of a philosophy and a feeling for two reasons.

I kind of have a philosophy and feeling of abundance.

A lot of people taught me.

I have a lot of private lender friends and attorneys.

And I, I, people helped me learn a lot before I felt comfortable lending my own money and then, then also our investors money.

And so I, my, so I, I love sharing and I've been on a number of forums and stuff.

So number one reason I'm thrilled is because I love sharing knowledge.

I feel like I love to give back and actually get a kick out of that.

I, I do it, I do it a lot with emails and texts that I get and stuff.

Number two reason is I'm thrilled to be at the, at the conference itself.

As I look at the, the, the schedule of what's happening, I'm realizing I'm getting some humility.

I'm realizing what I don't know about notes and I wonder which classes I'm going to go to myself.

So, yeah, I'm really thankful to be invited.

So, yeah.

And what's interesting, hey, you're welcome.

And you know, I'll tell people who are listening.

And for example, this is the first time Michael and I have held a conversation for people on this.

And it's about networking, too, meeting other people, seeing what they're doing, hearing their stories and getting that constant theme.

Because the people we're bringing to this event and speaking, I think you're going to hear a lot about humility.

You're going to hear a lot about doing the right thing.

And like me, Michael mentioned earlier, you know, he started, I started.

Most of the people who you're going to hear started with their own money investing, figured out the kinks, and then started to grow by then understanding the business and then possibly bringing in some outside investors.

Now there's other ways people may do it, which is they might start with trying to bring that, you know, outside investor money first.

That's really not my philosophy because you're learning on someone else's dime.

And real estate is a game where you can lose a lot of money, especially if you don't know what you're doing.

I'm so.

I'm so with you, Chris.

I'm so with you.

You see a lot of it online, you see a lot of it in life, and it's just.

It's a cringe.

It's a cringe.

Yeah, yeah.

I mean, you may have had.

Actually, no, you didn't even have blackberries at that point in time.

Trying to think like that.

I mean, I was buying a house then and I literally remember going to the real estate's office and like pulling the flyers because you really, I mean, you had aol, but you couldn't really house shop.

So if you're trying to raise money back then compared to today, it's so easy.

Easy to create a online influence of yourself, but also very easy to fake one, which we saw a lot of people do over the last few years.

So without spoiling your whole session, what's one thing you hope attendees who feel learn think differently about the space after hearing you speak.

You asked for one thing.

May I give you two things?

You can give me three if you want.

I only have two.

I only have two.

Okay.

Two things I hope.

One is private lending is extraordinarily profitable from an economic standpoint.

It's an inefficient market.

In inefficient markets, you can find great profitability.

Where else can you get a 12 return with collateral?

That is a first lien on property.

Where else can you get a 12% return with that type of collateral?

So number one, also with somebody.

Sorry, also with somebody who's got like a 780 credit score.

I want, I want to throw that in there as well.

Because we invest in the default loan, which we can go down a different road.

But that's the other component to that is you're giving it somebody with very excellent credit.

Yeah, thank you for mentioning that.

And a personal guarantee.

Yep.

So I mean, where else can you get 12%?

I mean, it's super profitable.

That's number one.

Number two, number two is a pet peeve of mine.

Some people say if you're gonna, okay, you can be a passive private lender or an Active Lender 1.

Right.

People say, oh, you can actively go ahead and lend your money out and be a private lender.

And it's really easy.

I disagree with that.

That is not true.

I think that's.

I think it's fraud.

It drives me crazy.

So my opinion is that you can do it, but it's going to take a lot of work.

You need to understand insurance darn well.

You need to understand title darn well.

There are a number of things that you need to understand before you use your money or certainly someone else's money, right?

So those are the two things that I hope it's very profitable.

But it's also something you need to.

To figure out.

You need to figure it out.

And anybody that tells you it's, you know, easy and, you know, can it be.

It's less passive, I think.

I mean, it's more passive than certain other aspects of real estate, but you have to be a lot more knowledgeable.

Like, I came from a commercial real estate, real estate development background, and so I knew I could build with my eyes closed.

I could manage a construction project with my eyes closed.

But when I got started, I could not for the life of me tell you the difference.

Like, the assignment went with the mortgage, the launch went with the note.

Like, I would confuse all collateral.

I would confuse everything.

And there is a lot to learn in this space that you just can't wing it.

So do you know what I like.

About what you said is you, you, you changed what I said a little bit.

And you said there's, there's a lot to learn, but then it's easy.

And that's, that's really a good distinction because yes, it is.

It can become easy, but it's just, it's not, it's not easy to start.

And you know, and it's.

It's still not easy because I'll give you a perfect example of I bought a loan two months ago, and we had the servicing transferred.

The borrower ended up selling the property, and they sold the property.

And we called the title company and we're like, hey, where's the money?

And they're like, oh, we already wired the money.

The.

Oh.

And so we were the third lender.

So when I.

Not third position.

We were the third lender to own the loan.

Still first position, but the first lender, the borrower contacted the first lender.

The first lender is like, oh, okay, here's the payoff.

Title company kind of, I don't know what they did a whole nother story, but they wired them the money.

So now we're trying to chase down, like, where's the money?

Where'd it go?

Title.

Like, what are you doing?

So all of a sudden it's like, whoa, timeout.

And this isn't something also that you should deal with yourself.

You know, you need to get an attorney involved to, you know, really.

So what I found with this business too, because I've matured into some of the private lending side of things, is, you know, knowing how to do it is.

And I'm just gonna put a rough number, 50%.

Knowing the people to go to when they're, you know, what hits the fan or you need a resource or need something is another 50%.

You know, if you need to put insurance on a property because somebody defaults, if you have a title issue or you need an attorney or if you need somebody to get a quick appraisal done or, you know, something that is so important.

So, yeah, 100.

You need a team.

Not necessarily with you, but you need to.

Oh, yes.

And it takes a long time to build that team.

It's not something that, you know.

It's about building a team and building a relationship with that team.

Yes.

So you've worked like, I mean, you've likely worked with all different types of investors.

In your opinion, you know, what, how do you, you were to describe, you know, enclose your eyes and say, that makes a great investor.

What would, what would it look like?

Okay, if, if you're an active investor as opposed to a passive investor.

Yeah, if you're an active investor, it's.

To me, it's all about due diligence.

Just period.

I mean, easy peasy.

All about due diligence.

No, no.

The heck you're doing if you're a passive investor.

When we have our funding partners, a new, a new person who wants to help them fund alone, they, we go through and we explain what we do and they understand it sometimes, you know, more or less.

Sometimes more, Sometimes less.

But the thing that they're really investing in, that I realize and talk about humility, is they're investing in me because no matter what the investment is, I'm the guy who's handling their money and I am humbled.

And just when I think about that, it's, it's an extraordinary privilege that people trust me enough to do that.

And, you know, that's, it's about reputation.

Right?

Reputation.

And so what I think if you're, if you're a passive investor for anything, you know, understand what you're doing, but it's really, it's really the person you're investing with because that's, that's what's going to happen.

You're going to feel comfortable with them.

And I'm, I'm on bigger pockets a lot.

And I saw somebody post something today that was invested in a self storage and it's been three or four years, they've never gotten a distribution.

They barely get any information.

And you know, a few people, you know, they're not getting what they should in my opinion, just my opinion.

And you know, certain people have went on and they kind of like yeah, well I saw it was a really good marketing video and this and that and you know, I'm always in a fan of if you're going to give somebody money, try and at least get a conversation with them.

Get to know them, you know, and make sure it's not a sales pitch like you're trying to buy a car now understand their philosophy, their business and what their experience is.

And from usually within, you know, 15, 20 minute conversation, you know, your spidey senses if you're a good read on people can kind of give you a.

Oh my God.

This person only talked about how great they are and everything.

If you've got.

This was hilarious back in the day when we were building our house well over 10 years ago, you know, we were getting subcontractors on board.

And I always tell anybody that's looking to get any type of work, if somebody walks through your property and all they're saying is how great they do the job and how great they've done this and they've done that and everything else, don't even ask for a bid from them, don't even get it.

But you want the guy asking, oh, what do you think you want to do here in this room?

What do you want to do?

Or you know, what's your schedule, you know, or what's, you know, asking legitimate questions about how they're going to do the work and not just trying to sell you on how awesome they are.

And I find that same thing in investing as well.

Yeah, 100%.

And there are a lot of people who are very charismatic.

You have to be careful.

Oh yes, A lot.

Really good.

So you have to.

So like you said, spidey sense.

Yeah, exactly.

So I think kind of may have just hit on it.

But you know, what's one mistake you often see newer investors make and you try to help avoid them.

Now let's just stick with active, active investors.

Yeah, Going to too.

Too big too fast.

Is that how you say too big too fast?

Yeah.

Yeah.

I had a friend who through a divorce had a.

Got a home worth a million dollars.

He lived in another state.

He said, hey, I want to make a Lot of money.

I'm going to flip this million dollar house.

And he'd never done it before.

Very smart man in his own profession, but he'd never done it before.

I told him, don't do that.

I mean, house flippers as sexy as some of these deals that you can see and profitable house flippers.

It's hard, should start small because you're going to make mistakes.

Even if you've, even if you think you know anything humble, remember, yeah, you're going to make mistakes, you may lose money and it's better to start small.

Frustrating to not go faster.

But trust me, going to be too, too, too soon is too soon is not, is not advisable.

No.

And, and it's people who, when I also see like they want to go from like one to a hundred deals in a year, I'm like, get your first few done and get them exited, you know, and then take what you learn.

You know, perfect example is back in the day, like we were building a 286 unit apartment building and you know, we'd always, you know, with the architect and say, hey, look, if you make a mistake in, you know, one unit, you know, that unit type goes through this building 50 times, you just made that mistake 50 times.

So you want to make sure that, you know, you get one.

Like that's why you do a mock up, you know, in construction, you build a mock up to see does it work, does it fit.

Investing if you're a private lender, do the mock up, do the first deal, get through it and then understand, don't do 10 deals and realize, oh my God, I forgot to charge.

Like, I know somebody recently did, did a loan and they had zero percent interest on it because they had a higher price.

Now they're trying to sell it and there's no default provisions, there's no default interest, there's no late fees.

So I'm like, you know, and it's in a state that's a very lengthy foreclosure process.

I'm like, technically this borrower, it's got zero percent interest.

So they could just make the payment and the loan matures.

Like it's going to take you a year to.

They could even stop paying.

And it's, you know, your money's just getting thrown away.

So.

Yeah, yeah.

Okay.

As we enter our lightning round.

Okay.

Okay, you ready?

So have you seen the ones where they do it as celebrities and watch them around, go around their house?

So.

No, I haven't.

They, they.

What about this?

What about, okay, I'M not a celebrity, so I'll just be here.

Okay.

What's one word you would use to describe the current real estate market?

Uncertain.

Yep, definitely would agree with that.

One thing you've changed your mind about in the last year, More due diligence.

We do more due diligence than we used to.

Yeah.

And 100.

You know what's funny?

Like everyone here is due diligence and then you like realize what it is.

And then that deal I just talked about, like we bought the loan, they said there is nothing I could do about that in any way, shape or form.

But now I'm trying to figure out as part of due diligence, like, oh, if there's a loan that's on the market for sale and we see something like do we try and figure out if there's a title company involved and just let them know after.

You know, it's like you always, your due diligence process always get refined and always continue to grow.

Yes, yes, we have.

We have.

I know this is lightning round but we have a processes and procedures manual and I looked at it a while but every time we learn something, I tell some of the awesome people who work with me, add that, add that.

We need to have that.

We 100% are constantly updating.

Yeah, exactly.

You can't just think you're going to.

Remember and one person you would like to thank for your success.

My, probably my father.

He's a great man.

He hasn't helped me at all in investing, but he's helped me life in general.

Right.

Hard work, the way you treat people.

Yeah, that's my, my dad.

Okay.

Nope, I would say the same thing.

So that's all right.

That's beautiful.

Unfortunately, I lost my dad about to seven years ago now.

It's been a while in the age of, you know, 69 years old.

So young guy, so.

Well, Michael, thank you for coming on this episode.

If people want to reach out to you, what's the best way for them to find you or contact you?

Sure.

The name of our, our private lending firm is called Silver Stream Funding.

So you can look@silverstreamfunding.com or if you want to give me a call.

Like I said, I believe in abundance.

Feel free to give me a call.

My number, it's still a New York number.

Don't kill me.

All right.

Yeah, feel free to give me a call.

Remind me that it's about this podcast, so I don't think you're right.

And no, I'd be happy to join.

For those listening, we'll have all that information in the show notes.

Okay.

Oh, good, good, good.

Yeah.

And I just want to thank you, Michael, for coming on and thank you, everyone, for listening.

And make sure to leave us a like and review on your favorite listening station.

Thank you, as always.

And make sure to follow the proper paper trail.